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Forex Flash: Chinese credit boom could roil AUD – UBS

Credit growth in China, measured by total social financing, came in at a whopping CNY2.54 trillion during the final month of the year, a new record. Even taking seasonal effects into consideration (analyzing January data in China is often more art than science), the general consensus is that the figure is extraordinarily high. As much of Asia returns from the Lunar New Year holidays, investors will be dissecting the data and more importantly, try to figure out where the money went/will go in the coming months and whether this marks a beginning of a new credit boom.

According to Chief China Economist Tao Wang, “trade data in China already indicated strong imports of commodities. Iron ore (+11%y/y) and coal (+56%y/y) - Australia's key exports to China - were the key beneficiaries, and as the purchases already reflect expectations for a recovery in investment demand, there is no reason to suggest that the coming months will score even higher.”

In particular, Tao notes that imports for stockpiling purposes ahead of peak construction season (March-April) were a factor, so we could make the argument that any tailwinds from a new investment boom for China have already passed. Besides, even if demand for real estate in China were to surprise to the upside and led to further growth in credit demand, it might not be viewed as a good thing for a country desperately trying to rebalance away from investment growth as the key economic driver. “In addition, the implications for inflation are rather obvious, and if price pressures force China to tighten policy well ahead of expectations, it would not bode well for AUD at all.”

Forex Flash: Gilts eye 114.47/30 support – RBS

According to Dmytro Bondar, a Technical Markets Strategist at RBS, “Gilts experienced another strong selloff after breaking its tightened range, as the 115.11 support was tested. The price action suggests there is more downside likely and the 114.47/29 stands as the main support region for now. This is the area of 200% Fibonacci projection from the December 2012 selloff and retracement of the March-June extremes. Below that the 113.83 and the 113.43 would be expected to provide support. On the upside, 115.50 stands out as an important retracement, which would likely limit any bounces.”
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Forex Flash: USD/CAD might squeeze back up to 1.0040/50 – TD Securities

Weak data reports overseas should not make much impact on the CAD, "with CAD/risk correlations dropping right off over the past few weeks (CAD/S&P 500 correlation on a rolling 22-day basis is more or less zero at the moment from +79% a month or so ago)", wrote TD Securities analysts, pointing to the importance of US-Canada debt yield spreads on the USD/CAD. "Short-term rate spreads remain an important driver of the CAD versus the USD, as we have highlighted in the recent past— especially as the risk correlation faded", said analyst Shaun Osborne and Greg Moore, observing notable narrowing short-term, undercutting the CAD, since the BoC’s more dovish rate message last month. "Longer-term spreads are moving against the CAD as well, however.  10-year US bond yields at 2.02% today are marginally above Canadian 10s for the first time since March 2012—another drag on the CAD", they continued.
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